The Rated Funds placed under review, on performance watch and discount monitoring

Following our first quarter review, the following four Rated Funds have had a change in status.

With more than 3,000 active funds to choose from, investors face an uphill task to identify the cream of the crop. 

To help readers focus their sights on the superior options, Money Observer created a shortlist of Rated Funds seven years ago. Over the years, our list has evolved, with an increase in the number of fund sectors analysed, the introduction of passive index funds in 2018 and most recently in 2020 we bolster our coverage of ESG funds: those that focus on environmental, social and governance factors when it comes to stock selection.

The list of Rated Funds is reviewed annually and also quarterly, with Money Observer’s investment committee keeping an eye out for certain yellow flags (see below).

Following our review of how Rated Funds performed in the first quarter of 2020, full details of which can be found in the two links below, three funds have been placed on performance watch and one on discount monitoring.

- Part one: How UK equity and global equity funds fared in the first quarter

- Part two: How regional, bond, property and specialist funds fared in the first quarter

Janus Henderson China Opportunities

It was announced at the end of March that the fund’s longstanding fund manager, Charlie Awdry, will depart in the summer to take a career break. He has managed the fund since 2006. May Ling Wee, who has been deputy manager since 2015, will step up to the role of lead manager. As a result, Money Observer has put the Rated Fund on performance watch.

Unicorn UK Growth

Had a first quarter the fund managers will want to quickly forget, declining -37.1%. In contrast, the FTSE All Share index declined by -25.1% over the period. Fraser Mackersie, who has run Unicorn UK Growth since 2011, can invest in firms of any size, but tends to focus down the market capitalisation scale where they find attractively priced growth opportunities. As a result, we have categorised the fund in the UK smaller companies sector, and over the quarter it was one of the worst performers.

In an update to investors, the fund management team said the sell-off has led to a “reassessment of the fundamentals of all holdings in the portfolio”. As a result, its cash position has been raised and now stands at 17%.

Given the potential for impending changes to the portfolio, we feel it prudent to put the fund on performance watch to assess whether this will lead to a change in style or approach.

Temple Bar IT

The value focus of Temple Bar (TMPL) was heavily punished in the first quarter of 2020, with the shares and the net asset value down -47.3%. The move by its board to de-risk by neutralising gearing in a fire sale of assets during March did not help matters and Mundy sold the least cyclically sensitive shares in the portfolio. While that left investors fully exposed to a cyclical recovery they were unlikely to reap the full benefits because, unlike other value-oriented peers, the shares were trading at a small premium to net asset value at the end of the quarter.

However, on 17 April it was announced that longstanding manager Alistair Mundy was taking an extended leave of absence for health reasons (not related to coronavirus). As a result, the board (on 20 April) announced it will conduct a review of its fund management arrangements and has served 12 months’ notice on Mundy’s employer – Ninety One (formerly Investec Asset Management).

As the portfolio looks today, it stands to do well if a cyclical recovery plays out and is even more contrarily positioned than before. The shares have now slipped to a 7% discount to NAV. The trust’s new managers, Steven Woolley and Alessandro Dicorrado, have worked closely with Mundy for many years. However, they do not command the loyal following that Mundy had built up during his 18 years at the helm.

During this current period of uncertainty surrounding its management, which follows a period of significant underperformance, the investment committee has decided that the most prudent course of action is to place the trust under review.

BMO Commercial Property IT

Investment trust discounts slumped notably during the sell-off as investors rushed for the exit, amid concerns over the impact coronavirus will have on the economy, particularly in the short-term given the lockdown measures in place in the UK and across the globe.

Commercial property trusts were among the hardest hit over the quarter to 31 March and at one stage BMO Commercial Property (which saw its share price decline -34.6% in the first quarter) fell to a 66% discount to its last published NAV, which was at the end of December.

The board reported (on 16 April) that BCPT’s net asset value fell 5% over the first quarter and noted that rent collection for the first quarter had been challenging and expected a similar situation in the second quarter.

The trust’s loan to value (essentially its gearing) is around 23% but there is no danger of the trust breaking covenants on its £260 million long-term loan. A shorter term loan, for £50 million, has more challenging interest cover tests, but the lender has stated it is prepared to support the trust through this uncertain period.

These uncertain conditions have led the board to suspend its monthly dividend payments in order to increase the trust’s cash reserves (£20 million and an undrawn revolving credit facility of £50 million) and “protect the long-term value of the group”. 

BCPT’s discount remains high, at -49.5%, and given the uncertainty over the outlook for the economy and the ability of the trust’s tenants to pay rent in full – which directly affects the resumption of dividend payments – we have placed the trust on discount watch as we are concerned that it may fall further.

Although the trust’s monthly dividends, which equated to an 8% yield on the 31 March share price of 74.5p, have been suspended, we are hopeful that it is a temporary measure and we will reassess the trust’s Rated Fund status at the next quarterly review.

The yellow flags we look for

Manager change: Some funds are managed using a team approach, whereas others have a lead manager at the helm. When a Rated Fund manager departs, our default position (unless an established co-manager is taking over) is that we put the fund under review.

Fund too big: Some fund management firms ‘soft-close’ a fund when it hits a certain size, often by imposing an initial charge to deter new investors from investing. When Rated Funds are soft-closed, we place them under review.

Performance down: On a quarterly basis we keep tabs on how all our active funds are performing versus both peers and their benchmarks. Where we have concerns over performance, we will place a fund under review.

High premium: High investment trust premiums are another red flag that investors should keep an eye out for. We may put Rated trusts under ‘premium watch’ if we deem the price premium to net asset value to be excessive for new investors.

Discount monitoring: We also keep an eye on trusts that see a notable change in their discounts over a short period of time.